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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 457791  
Subject: Re: Mortgage Interest Deduction Debate Date: 11/28/2012 11:03 AM
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Homebythesea asks : Is it true that on the schedule E, a landlord can deduct 100% of the mortgage interest and taxes (with depreciation!), AND still get the standard deduction even if they don't meet the schedule A minimum?

HBtS, you are correct. You can deduct mortgage interest on a rental property as a business expense.(See IRS Publication 535, Business Expense [1]) This is totally independent of being able to take the standard deduction on schedule A.

YOU ABSOLUTELY, POSITIVELY SHOULD GET YOUR INDIVIDUAL SITUATION LOOKED OVER BY A CPA OR ENROLLED AGENT. There might be some other factors for a specific taxpayer that changes the deductibility.

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FastMike asks about the tradeoff of paying cash for a house instead of taking a mortgage. FM understands that the mortgage interest deduction will be of little value in his case.

FM, personally I would get a fixed rate, 30 year mortgage with 20% down. I would not pay cash for the whole amount. A few points:

1) The folks loaning out money for 30 years at ~ 3.45% make an assumption that inflation will be “well contained” for the full term. I might be 100% wrong, but I would not take that bet. My bet is that inflation will average >= 3.45% over the next 30 years. So taking a 3.45% loan is pretty low cost.

2) Let’s assume we get some form of Armageddon. It might be the fiscal cliff, EU insolvency, bond vigilantes show up, Kim Kardashian is elected President, etc. There is a small, but finite chance we get overall deflation. It is possible that house prices will drop further and stay down for many years. In the worst case scenario, you might want to “mail in the keys” to the mortgage company. Take a cue from Wall Street and use “non-recourse” mortgages literally. This might not work in your house is in “recourse state” where you are personally liable for the loan in the event of a default.

3) Lastly, being a METARite, I would make the bet that you can get >=3.45% long term returns with relatively LOW RISK. You certainly would not want to invest in anything high risk with these funds.

4) I never diminish people’s desire for the peace of mind that comes from having a free and clear house. In many cases, this overrides any financial consideration. I have no problem with this path.

Thanks,

Yodaorange
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